GBP
Last week, there was little volatility between the sterling and euro, with the exchange rate range fluctuating just 40 pips (0.004 cents) between its peak and trough. As we close this week, GBP/USD is at almost 1.29, which is the highest it has been since July 2023.
On Wednesday Jeremy Hunt announced the latest UK Budget, in what will likely be the last fiscal event before the next general election, thought to be coming during the second half of the year. He was careful not to throw out any huge tax-cut surprises, with the Truss/Kwarteng mini-budget still fresh in recent memory, but with the Conservative party under increasing pressure, as we roll towards the still unknown election date, Hunt would have been keen to make an impact.
There was a significant focus on personal tax cuts, with Hunt revealing a second 2p reduction in National Insurance. The move seemed to spell out the Conservative’s intention of completely abolishing the tax, which Hunt called “unfair” and a double taxation of work that penalised it rather than encouraging it. However, he was quick to admit it wouldn’t “happen any time soon.”
The pound remained on a positive footing following the budget as it was broadly in line with market expectations and didn’t impact the market anticipation that rate cuts would come from the Federal Reserve and the European Central Bank before the Bank of England makes its move.
Labour still has a significant lead over the Conservative party. Although the latest polling data has not been released since the budget, Rishi Sunak and Jeremy Hunt will be hoping their tax cuts will have made a dent in Labour’s 20-point lead.
Whilst the general election is likely to be some way off, political uncertainty for the pound could happen well ahead of this event.
EUR
A few data events for the EU impacted the single currency this week after a somewhat quiet spell. The first significant economic data release came on Wednesday, when European retail sales began to show some recovery, with the month-on-month reading forecast increasing from a previous -0.6% to 0.1%.
This week’s most important event for the euro was on Thursday when the European Central Bank (ECB) met to deliver the latest interest rate decision. Ahead of the meeting, the refinancing rate was forecast to remain unchanged at 4.5% for the fourth time and the central bank opted to hold rates steady, despite lowering its inflation forecast from 2.7% to 2.3% this year.
However, the news could impact future decisions. President of the ECB, Christine Lagarde, spoke later in the afternoon about the region’s economic growth plans and the current view on interest rate cuts. Her comments seemed to align with market expectations that we could see the first reduction in interest rates in June, saying, “We will know a little more in April, but we will know a lot more in June.”
The narrative could continue to develop a less hawkish tone after recent inflation data released from the major EU economies showed that the decline was continuing. The preliminary estimations for February’s monthly inflation data in the Eurozone also showed continued deceleration, with inflation falling from 2.8% to 2.6%.
To end the week, we saw year-on-year European GDP data released for Q4 on Friday. Growth came in as expected and was unchanged at 0.1%. Although this shows stagnant growth across the region, it still reflects a more positive performance than the UK’s shallow negative growth last quarter.
Disclaimer: This commentary does not constitute financial advice.
